The Impact Of Fees On Investment Returns!

Fees on investments can be huge drag for your investments returns.  One of the easiest ways for mutual fund investors to boost returns is to reduce their costs by using ETFs!

I will consider 4 levels of fees (as a percent of the invested assets) in this article:

  • 0% – Representing an ideal world if there were no costs to investing
  • 0.5% – The costs I think do-it-yourself investors can limit their costs to using ETFs. See Sample ETF Portfolios for an ETF portfolio that will cost even less!
  • 1.5% – The cost of an investor paying about 1% in fees for advice plus about 0.5% costs associated with ETFs.  This would be for investors who do not care to do the investing work themselves, which is perfectly fine and reasonable
  • 2.5% – The typical fee on an equity mutual fund in Canada

Portfolio Ending Value Comparison in Percentage Terms

I am going to assume that an investor, at minimum will incur a 0.5% annual cost when it comes to investing.  If an investor incurs 1.5% or 2.5% in annual fees over 10, 20, and 30 years, how much lower will their portfolio value be compared to a 0.5% annual cost?

The table below shows that over a 10 year period, an investor’s portfolio value will be 10% lower when paying a 1.5% fee and 18% lower when paying 2.5% fee.

Over 30 years, the portfolio value is 26% lower when paying a 1.5% fee and a staggering 46% lower when paying a 2.5% fee (yes, that’s right, the portfolio value pretty much gets cut in half)!!

Portfolio Value Comparison of Paying 1.5% and 2.5% Fees Vs 0.5% Fee

Portfolio Value Comparison of Paying 1.5% and 2.5% Fees Vs 0.5% Fee

Portfolio Ending Value Comparison in Dollars

The charts below show what a portfolio with an initial investment of $25000 and a 7% annual return will look like after 20 and 30 years at various fee levels.

Impact Of Fees - $25k Starting Portfolio, 7% Return

Impact Of Fees – $25k Starting Portfolio, 7% Return

Conclusion

Paying high fees similar to what most mutual funds charge will leave an investor with significantly less wealth over the long run.  The numbers above do not factor in the additional ‘load’ fees that mutual funds can charge.

Given that people will likely have their retirement funds invested for 30-50 years, keeping costs low should be imperative.  Don’t want to lose half your money?  Lower your fees!

Edited by Janet Ngo

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